The Customer Revolution

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Wednesday, 20 July 2016

A
few months ago I read “The Fourth
Industrial Revolution” by Klauss Schwabb, which seemed to frame the
debate at the World Economic Forum in Davos. I was struck by the power of the
language used at the WEF:

“We stand
on the brink of a technological revolution that will fundamentally alter the
way we live, work, and relate to one another. In its scale, scope, and
complexity, the transformation will be unlike anything humankind has
experienced before”

A
few weeks ago I listened to George Colony, the CEO of Forrester describe the
next decade as one that would create an “existential
crisis for every company on the planet”.

More
recently, I had the pleasure of facilitating a roundtable debate between 20
board directors from 20 of the largest companies around the world on the topic
of how boards should be responding to digital disruption. A few thoughts and
themes struck me…

The
last decade has arguably seen the greatest and most compressed degree of
technology driven change that the world has ever seen. However, far greater
change is likely to happen in the next ten years as many technologies, from
diverse fields hit their critical inflection points at the same time –
artificial intelligence, advanced robotics, blockchain, genomics, nano tech,
drones etc. These technologies are
combining together to create Cambrian-like explosions in industry after
industry, creating profound questions both for societies, companies and their
boards.

Some
of the market forecasts are alarming. At the current run rate 75% of the
companies in the S&P 500 in 2027, will be displaced by new entrants. By
2030, 2 billion jobs will disappear (that’s roughly 50% of all the jobs on
the planet) as a result of technology advances.

Companies
in every sector face a multitude of challenges, up and down their value chain:

·Competition from both sides - new start-ups with radically
different business and operating models as well as mega-vendors entering and
disrupting industry after industry

·Dramatically rising customer expectations

·Very high levels of technical debt and digital wastage as buyers
jump to new technology fads and tactics

·A constant and relentless onslaught from cyber attackers

·Significant risks of legal and regulatory breaches as companies
operate within an ever-changing patchwork quilt of international standards and
regulations

·Huge pressure on traditional IT systems, supply chains, organisational
structures, skills & cultures, ways of working etc that were simply never
designed to cope with the speed of change that we see today

On
the flip side, the same forces driving tech disruption also offer companies game-changing
opportunities:

·The opportunity to re-invent business models, for example moving
from products to services as companies like GE have done with GE Digital

·The ability to reimagine experiences, operations and supply chains
– Aprecia Pharmaceuticals recently won regulatory approval to 3D print one of their drugs, giving
them to potential to re-write the entire way they think about manufacturing and
distribution.

Given
the broad range of opportunities and threats above, it should be clear that doing
nothing to consider the impact of technology-driven disruption is simply not an
option. That has been clear in some industries for many years, however, it
should now be clear in every industry. However, a question that I don’t
believed has received enough attention is what role should the board play? One
non-exec recently commented to me that good board members start by asking
better questions so here are some starting questions for boards in the fourth
industrial revolution to consider:

1.Do we have the right composition in the board to
be able to navigate the fourth industrial revolution?

Arguably
the board’s response to the fourth industrial revolution needs to start with
composition. A recent report from the CBI (Confederation of British Industry)
suggested that companies should both appoint a digital native board member and
also improve digital awareness of all board members. Some boards have clearly
made strides to improve diversity of skill-sets. Starbucks (Clara Shih from Hearsay
Social), Walmart (Kevin Systrum (instagram and Yahoo), Tim Hortons (Chris
O'Neill (Google Canada) have all appointed digital board members. A Private
Equity company in Hong Kong called Deep Ventures even appointed an Artificial
Intelligence machine to their board. Yet, according to a recent study by Russell
Reynolds Associates 80% of 300 large, global companies did not have a single
director with substantial digital experience. Today, boards need diversity (in
every sense of word) to make sense of the extreme pressures on the company
created by technology, regulation, activist shareholders, labour unions etc.

2.How will the company’s purpose, vision and
strategy need to evolve for the digital age?

A
company’s response to the fourth industrial revolution needs to begin with its
purpose. Without purpose and vision there is no context to make prioritisation
decisions on digital investments and almost inevitably executives will focus on
digitising the business of today, rather than re-inventing the business for
tomorrow. Companies will focus on creating and executing digital strategies,
rather than a business strategy for a digital age. In years past, the role of
the board may have been to simply provide an annual review and endorsement of
the strategy created by management. Today, companies should be considering how the
strategy process needs to evolve and how they can better leverage the knowledge
and expertise in their boards for competitive advantage. In turn, boards need
to challenge and hold the company true to its purpose.

3.What risks and opportunities does technology
create for the company up and down the value chain?

Digital
leaders think broadly about the impacts of new, disruptive technologies from
front, middle to back office. One board member recently told me that his
company seemed obsessed with spending money on “front end sizzle”, but were not
taking the easy value that could be created by driving efficiency through
automation within their operations. Digital is a portfolio play (Sustaining,
Adjacent, Disruptive), rather than a race to win digital marketing awards. The
portfolio of one company will vary considerably to the next, but each should
have a portfolio and the board should play a critical role in determining the
balance of that portfolio and holding the executive team to account.

4.How quickly and aggressively do we want to
execute?

Several
companies I work with can see a future where the company’s business model looks
very different to today, but they are struggling with how to get there.
Consider the Automotive Company renting fleets of autonomous driving vehicles
to city P2P car sharing schemes, or the Health Insurance Company who can
predict and prevent health conditions based on digital data. But, many of these
companies have incredibly profitable businesses today, and, in many cases
technology has not yet reached the mass adoption needed for radically new
business models to succeed. A key question for boards therefore is the extent
to which they wish to disrupt the current business and how management will cope
with the transition from old to new.

5.How are we building the right skills and talent
to manage the transition?

Talent,
not technology, will arguably be the most difficult battleground for the next
decade. Already we face critical skills shortages in areas like cyber and new
technologies. In addition, as digital increasingly becomes interwoven into the
fabric of the business, every role (from CEO, CIO and CMO to CFO, COO) needs to
be up-skilled for a digital age. Many executive teams in industries that have
not yet experienced significant disruption lack real experience of navigating
the challenges created by disruptive technology.

6.How will we measure management on success?

Boards need to ensure that they are holding management
accountable for the right things. Unfortunately there is a significant danger
with digital that companies will measure the wrong things (typically clicks
& likes). Boards need to challenge their executive teams to show more
tangible progress, by focussing on e.g. the success of the new business model,
the extent to which the company is fulfilling its purpose, the company’s
readiness for their new business model, cyber attacks, talent etc. Arguably, if
digital is infused in a company then digital should enhance every dimension of
the balanced scorecard, rather than create a new set of metrics.

7.What are the legal and ethical issues arising
from our investments in technology?

The Audit Committee chair in particular has responsibility
to consider legal and ethical risks for the board. Unfortunately disruptive
technologies will create many challenges in this space. Consider, for example,
an automotive company moving towards “lights-out” operations and autonomous
driving vehicles. As technology displaces jobs, the board will have to consider
the social implications. As AI technology increasingly takes decisioning away
from human drivers, companies will have to consider what happens when
technology gets things wrong. If a car crashes, how will it minimise the damage
it causes and who will ultimately be to blame when things go wrong?

Of course there are many more questions that boards need to
consider, but hopefully the above offer some suggestions to getting started.
Feel free to reach out to me to suggest more!

Monday, 2 November 2015

Despite 30 years of digitizing analogue information and
connecting devices to networks; despite the obvious explosion of eCommerce,
mobile, social media; despite the massive disruption to the music industry,
newspapers, books, retail, advertising; the digital technology revolution has
barely begun.

According to Cisco's former CTO, Padmasree Warrior, we've only
reached 1%
of the potential connectivity that we will see in the next decade. The
exponential growth in connectivity will be driven in part by connecting the
remaining 40-50% of the world's population who today do not have access to
broadband (most of the technology giants have ambitious programs in place to make
this happen via internet
balloons or solar
powered drones). But the real explosion in connectivity will come through
the embedding of sensors, chips and SIM cards into everyday objects – things we
wear, things in our home, our infrastructure, factories, machines, buildings,
cities; even a bottle of
beer can now be connected.

Connectivity on its own is not particularly disruptive, but the
combination of the explosion of connectivity with wave upon wave of new
technology, (including artificial intelligence, robotics, 3D printing,
blockchain etc) will transform previously dumb products into smart, connected
products and previously isolated “things” into nodes within smart,
self-learning networks. A connected thermostat that previously offered only remote
control access via a mobile device, may be transformed into a device that
optimises energy consumption and group-buys energy on behalf of a collective. A
medical device that checks blood pressure, may be transformed into a diagnostic
device that combines multiple sources of data and compares health data with
millions of users. Cars may be transformed from metal boxes on wheels into smart
fleets of autonomous driving taxis.

Today the speed of change is uncontrollable and unfathomable to most
businesses. Today a new technology can reach a critical mass of 50m users in
just 35 days. However, what’s both frightening and exciting in equal measure is
just how nascent some of these developments still are and how much disruption
is yet to occur.

Within Healthcare - Genomics
England aims to sequence 100,000
genomes, which would create 21 Petabytes of valuable data. A huge step
forwards for medical science but still only 0.15% of the UK population.

Within Automotive – we’ve already seen Tesla release a software update
containing the capability for level 2 auto-pilot, but IHS
Automotive estimate that it will be more like 2030, before we see
self-driving only cars on our roads.

Within energy, there are currently around 2 million smart meters already
installed in UK households. Smart energy GB aims to see connect 26 million households by
2020, so today we’ve reached less than 10% penetration of smart meters.

According to Canalys, the Global 3D printing market was $3,8bn in 2014,
but is set to grow to $16.2bn
by 2018. Today, the vast majority of people and businesses do not yet use a
3D printer.

After "60 years of
false starts", the Artificial Intelligence market also looks set for exponential
growth. Tractica
estimate growth from a surprisingly low $202.5m in 2015 to $11.1bn by 2024

The combinations of these technology-driven developments will impact
every company in every industry sector. Companies that have previously only
digitized their front end web sites and apps, will see impact up and down the
value chain. If every car is connected and autonomous, will motor insurance be
needed? Will consumers still buy cars or will cities buy them under peer to
peer schemes? If every aspect of my health and wellbeing is connected, how will
my health insurance policy change? How will the healthcare system change from treatment
to prevention? How will the pharma sector shift from selling pills to delivering
outcomes? If robots are set to take 35% of UK jobs, what
new careers will emerge? If 3D printing significantly reduces customs and
excise duties, how will the tax systems around the world respond? Moreover, if
we are already 20
years behind the skills needed in the market today for cyber security, what
on earth will the deficit look like when we reach 50, 70, 90% connectivity?

The previous decade of technology-driven disruption has already brought profound change, but things have barely
started. Today the questions are getting more and more interesting.

Monday, 27 July 2015

Over
the last few years, previously dumb physical products have rushed to add
connectivity and online services to their offerings. Product designers of
everything from jet
engines to tennis
rackets, contact
lenses to oil
rigs and even beer
bottles have hacked their own products, embedding chips and sensors into
them.

Despite the seemingly daily
release of new, smart, connected products, this trend has barely begun. Cisco's
CTO, Padmasree
Warrior estimates that we have reached just 1% of things that will be
connected over the next decade. At the start of mega-trend it's worth thinking
about a simple equation to drive success.

SCP = (CJ x C x N2 x
AI) x T

OR
Smart connected product success = find a killer answer to Customer Jobs multiply
by Connectivity, Networks, Networks of Networks, Artificial Intelligence and then
by Trust.

The
first step in the equation is having a killer answer to a customer job.
Ultimately I suspect many connected products will fail because they simply
won't deliver enough value to users to be viable – do we really need to control
heating in our insoles?. Smart, connected products need to first help a
customer complete the job they are trying to complete faster, cheaper, better
OR by creating significant new value.

Once we've identified the job
that the customer is trying to do and the way in which the smart connected
product can create value, Connectivity then becomes the second element of the
equation. The embedding of a SIM card, chip, beacon or sensor opens up a world
of possibility for users to interact with their product, gaining information
and insight or allowing a remote control function. However, many smart
connected products stop here. They offer simple connectivity to allow customers
to, for example, remote control their central heating but little more… At this
stage of the equation a great deal of potential value is left on the table.

In order to unlock additional
value, it's worth thinking about networks and the value of the data contained
within them. A connected fitness monitor, thermostat or jet engine is
fine, but one that connects with a broader network is able to release far
greater value, allowing users to generate insight from comparative benchmarks
e.g. engine or fitness performance against peers. Most fitness monitors do this
well, allowing users to compete against both their friends and other users of
the network.

Connecting multiple networks can
unlock exponential value. For example, connecting a network of thermostats to
networks containing electrical appliances, weather forecasts, energy prices,
carbon emissions, pollution levels etc gives users far more than just a remote
control for their thermostat. Furthermore, by adding artificial intelligence,
products can become genuinely smart. Picture the smart thermostat plugged into
a network of thermostats to group buy energy based on an algorithm that
predicted price rises and discounts, and worked out exactly when to power
appliances around the home based on their energy consumption.

The final element of the
equation, however, is arguably both the most important as well as the most
overlooked. Trust is something that can take years to build up, but can be lost
in an instant through a cyber attack, a data privacy breach or an ethics
breach. Once it is lost a negative trust score is disastrous and renders the
preceding equation entirely worthless.

Many
companies currently investing in building smart, connected products fail to
recognise that their trust score is already a negative one. Through years of
mistreating customers and failing to build relationships, they arguably have
little chance of succeeding without addressing their trust deficit. Others are sacrificing the trust equity that they
have built up by launching new connected products with nothing like enough
thought and attention given to cyber security and no clear policies on data
usage, sharing or ethics. In the last few weeks alone we have seen cars, planes
and home appliances all hacked and taken over by either friendly or unfriendly
hackers.

Without question, smart,
connected products offer companies the potential for radical innovation and disruption.
Entire business models and propositions can be re-written. But success rests
not only the attention given to innovation around customer jobs, connectivity,
networks and AI, but also on Trust. Without trust, a smart, connected product
is nothing but a ticking time bomb for the share price.